Trade Credit and Supply Chain Relationships

Abstract

This paper examines how trade credit regulation influences supply chain relationships and network structure. Exploiting the implementation of France’s Loi de Modernisation de l’Economie (LME), which imposed strict limits on inter-firm payment durations, we employ a difference-in-differences design using granular global supply chain data. 

Contrary to the policy’s intended objective of stabilizing supply chains by alleviating supplier financial constraints, we find that mandated shorter payment terms significantly increase the likelihood of relationship termination, particularly for upstream links and low-margin suppliers. At the same time, the regulation stimulates the formation of new downstream relationships. These opposing forces lead to a structural reconfiguration of supply chains, resulting in shorter and flatter network structures. 

Our findings provide support for the incentive-provision view of trade credit, demonstrating that deferred payments function as a key relational governance mechanism rather than merely a source of short-term liquidity. When payment flexibility is constrained, firms strategically redesign their supply networks in response to weakened relational enforcement.

Keywords: trade credit regulation, supply-chain finance, reverse chain stuffing, difference-in-differences